Financial Planning News Letter

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It’s getting hard to miss the decline of the U.S. dollar. As an American living in Japan, I keep a close eye on exchange rates and have watched the value of a dollar drop from 125 yen in June 2002 to its current value at around 109 yen. That’s a 13% drop. During the same time period, the dollar fell 15% against the Euro and 11% against the Swiss Franc.

This is great news for me and others like me who have assets in non-dollar currencies. However, we’re in the minority of Americans. If you’re like most Americans, you save dollars in a bank and move some of those dollars to a brokerage where you buy dollar-denominated investments.

You can change that, though, and make money off what appears to be a solid downtrend in the greenback. I’ll come back to how you can profit in a moment. First, let’s take a look at the evidence behind our sinking currency.

The reason the dollar is falling is that the full faith and credit of the United States is weakening under a growing budget deficit and enormous debt. Our country is $7 trillion in debt. The lenders are getting nervous about the increasingly precarious financial situation of the United States. Therefore, they demand higher payment on their debt. What they are owed are dollars, however, not a specific profit level. The simple solution for the government is to print more of those dollars, thereby lowering the value of each one and making the impact of the staggering debt load less forceful. The U.S. is awash with cash these days thanks to the low interest rates maintained by the Federal Reserve. So, we have a shaky credit foundation and dollars that are worth less every day.

Meanwhile, President Bush is cutting America’s income by reducing taxes and increasing America’s spending. From The Economist:

For all his rhetoric about keeping Washington in check, Mr Bush, as one Republican analyst puts it, has been spending like “a drunken sailor”….The combination of a sharp economic slowdown, tax cuts and higher spending has transformed America’s budget. When Mr Bush ran for office, the fiscal surplus was 2.4% of GDP, one of the highest among big rich countries. By fiscal 2003, the budget deficit had reached 3.5% of GDP. Next year, by official forecasts, it is expected to reach 4.3%….In their most recent poll, members of the National Association of Business Economists described the federal deficit as the biggest problem facing America’s economy. A bipartisan coalition of three economic think-tanks — the Committee for Economic Development, the Concord Coalition and the Centre on Budget and Policy Priorities — recently declared that, without a change in course, the next decade might be the “most fiscally irresponsible” in the country’s history.

Some of the smartest investors in the world noticed this trend in the past year or so and have moved into investments pegged to non-dollar currencies or have taken short positions against the dollar, betting that it will move lower. The two investors I’m thinking of most are George Soros and Warren Buffett.